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Option strategies buying
protective puts
Bearish strategies
The buyer of a put option has the
right, but not the obligation, to sell the
underlying stock at a fixed price (the
strike price) for the life of the option.
Because the value of a put option
benefits from a decline in the underlying
stock price, many investors use puts to
protect their stock positions. In many
respects puts, when used in this fashion,
can be viewed as insurance policies.
Why Investors looking for ways to
 0
reduce their exposure and/or protect
the value of their equity positions
may consider purchasing a protective
put option, as an alternative to selling
shares. The put purchase reduces
downside exposure while allowing for
continued upside potential.
Strike price The strike price of
 n Stock
the put option determines the level
at which the investor may choose
to exercise and sell their shares. Put
options with higher strikes prices
afford greater protection for the
underlying stock. These higher strike
puts will also have higher premiums.
Like an insurance policy, a put with
a strike price that is less than the
stocks price can be viewed as having
a deductible. Because the put affords
price protection below the strike
price, investors who purchase out-
of-the money puts assume the risk
of the difference between the stock
price and the strike price. Also, like
an insurance policy, the further out-
of-the money (higher deductible),
the lower the premium. The investor
must weigh the trade-off of the lower
premium and the higher deductible.
Expiration Because the option will
 investors risk is eliminated below the
have a finite life, it will be important
to choose an option with an
expiration date that more than covers
the time frame that the investor feels
the stock is at risk.
6 option premium.
4
2
-2
-4
-6
-8
-10
-12 40 41 42 43 44 45 46 47 48
-10 -9 -8 -7 -6 -5 -4 -3
n Stock + Productive Put
Protective put example
With the underlying stock trading at
$50, an investor looking to reduce the
risk of holding the shares may choose to
purchase a put option. After reviewing
the stocks performance and potential,
the investor decides to purchase the
three-month put with a strike price of
$45. This will allow the investor to sell
the stock at the strike price ($45) should
the price decline over the next three
months. For this right, the investor will
pay a $1.50 premium ($150/contract).
In this example, the $5 difference
between the stock price and the option
strike price could be viewed as the
deductible for this insurance. The
strike price minus the option premium
(45 - 1.5 = 43.5). Conversely, if the stock
finishes above the strike price, the
put will expire worthless. If the stock
moves higher over the life of the put,
the investors only risk is the loss of the
An interesting observation can be
made about the protective put position
from this chart. The chart above looks
similar to the long call strategy. In fact,
it is. Buying a put against a long stock
49 50 51 52 53 54 55 position creates the same risk reward
-2 -1 0 1 2 3 4 5
profile as the long call. In the previous
example, the long stock/long 45 put has
the same profit/loss potential as being
long the call with a 45 strike. Both of
these positions have limited risk and
(theoretically) unlimited potential.
Speculation Put options may also

be used to speculate on a decline
in a stocks price. Investors using
puts in this fashion should take
into consideration the same factors
when buying any option contract.
The strike price will be an important
consideration as this is the level at
which the stock may be sold upon
exercise. The expiration date for the
option must cover the time frame that
the investor believes the stock is at
likely to decline.
Page 2 of 2 Option strategies buying protective puts, continued

Long put example

An investor who thinks ABC stock
is overpriced at $50 and will decline
over the next two months decides to
purchase a put option as a way to profit
from the move. They choose a put with
a $50 strike price (at-the money) and a
three-month expiration date (more than
covering their expected time frame) at a
$3 premium. If they are correct, they will
profit if the stock price declines below
the strike price minus the premium
paid (50 - 3 = 47). The investor will profit
point for point as the stock declines
below this level.

5
4
3
2
1
0
-1
-2
-3
-4
43 44 45 46 47 48 49 50 51 52 53 54 55

n Long put

Conversely, the investors maximum

risk if the stock price rises is limited to
the price of the option.

A few things to remember

Like any insurance policy, the
premium paid is an out of pocket
expense. This, combined with any
out-of-the money portion of the
option, will be the investors risk.
As with all options strategies, the
expiration date of the option should
more than cover the investors
time frame.

This strategy sheet discusses exchange-traded options. It is not to be construed as a recommendation to purchase or sell a security. Before engaging in the
purchasing or writing of exchange-traded options, investors should understand the nature and extent of their rights and obligations and be aware of the risks
involved, including the risks pertaining to the business and financial condition of the issuer of the underlying stock. Listed options are not suitable for all investors.
Prior to buying or selling an exchange traded option, a person must be provided with, and review, a copy of CHARACTERISTICS AND RISKS OF STANDARDIZED
OPTIONS. A copy of this document may be obtained from the RBC Wealth Management Compliance Department, 60 South Sixth Street, Mpls., MN 55402
Phone: (612) 371-2964. Additional supporting documentation including statistics and other technical data are available upon request.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC. 2016 All rights reserved. 7103 (01/16)